Things you can do

Throughout my nearly 25 year career as a professional investor, I have seen all kinds of practices that don’t help customers. Many of these practices afflict individual and institutional investors alike. The bad news is that many of these are widely accepted conventions that can be hard to circumvent and can make it feel like the playing field is not level.

The good news is that there absolutely are things you can do to improve your chances of getting the most out of your investments. The following are some good places to start.

Build better filters

Coincident with the proliferation of investment information has come the proliferation of information that is incomplete, misstated, and even deceptive. It is a big enough challenge on its own to filter through the noise, let alone trying to do so on part-time or periodic basis. That said, there are a lot of smart people and a lot of useful information out there that can help - if you know where to look.

Areté provides a great deal of information that you can use to enhance your knowledge base with the intent of better arming yourself against risks in the market and poor value propositions in the industry. In addition, we also make a special effort to explain our interpretation of various market action and to provide the attendant context and assumptions so that you can best apply the insights to your situation.

Pick your spots

We all must manage scarce resources which means doing the best with what we have. This simple insight leads to several important implications.

First and foremost, what are you trying to accomplish? If you are investing now to provide some greater benefit later, you should make sure that investment activity today has a high chance of providing that greater benefit later. It is not guaranteed by any stretch. If there is not a good chance of reaching your objective, you will need to revisit the objective. It doesn’t help anyone, especially in a fiduciary capacity, to harbor unrealistic expectations.

With a clear understanding of your goals and priorities, it is much easier to make tradeoffs. Many people prefer to avoid investment discussions altogether and to outsource everything. This course of action can work, but as with anything, it often entails a very significant premium for convenience. Further, just about any time investors become inflexible, Wall Street is willing to provide a solution - but at a price attractive only to them. As such, it is often possible to manage an overall portfolio more cost effectively by being flexible, doing some work on your own, and hiring experts who can complement your efforts and fill in knowledge gaps.

Perhaps one of the most important things you can do is to eliminate waste. Fees throughout the industry are stubbornly high. Service fees should be scrutinized on both a relative basis and an absolute basis to ensure you get good value from what you pay for.

Finally, the world of investing is filled with tradeoffs and is constantly changing. Under such circumstances, and especially when resources are limited, it is counterproductive to become fixated on a “perfect” solution. Too often such a focus on “perfect” precludes ideas that are very good and much better than what is currently in place.

Pick your partners

Regardless of the service you are investigating, you want to make sure the people are competent, conscientious, and committed to what they are doing. Given the growth and profitability of the investment industry over the last few decades, however, none of these qualities has been essential for service providers to make a lot of money. As a result, a lot of industry participants masquerade as investment professionals and probably even worse, many participants that do have special knowledge often use it primarily to enrich themselves.

Of course nobody advertises such deficiencies which means it’s important to develop skill at rooting them out. One of the most useful rules is the aphorism: “Actions speak louder than words.” A solid indication of “action” can be found in the stakes of the principals. If they are heavily invested in their firm and their own investment services themselves it is a good sign that they really believe in the value of what they do.

Interestingly, many conventions in the investment industry regarding service provider evaluation are misleading or outright wrong. Size, for example, is often the primary gating criterion which is truly unfortunate for investors for a number of reasons. For one, because there are only limited opportunities in the market to exploit inefficiencies, it follows directly that size, in a portfolio context, is the enemy of performance. Larger funds may seem “safer”, but their performance will also be constrained, all else equal. There are tradeoffs, of course, and this is not to say that there are not disadvantages to small funds. Implementation of the “size” criteria, however, perpetuates a great deal of both portfolio and business inefficiency though.

Finally, when evaluating service providers, it is not unfair to consider what the relationship feels like. It usually isn’t very difficult to tell if someone is really trying to help you succeed or not. If not, there is little value in maintaining the relationship.

Keep at it

Because the investment environment is constantly changing, it creates challenges for those who are inflexible and opportunities for those who stay regularly engaged. With ongoing learning and regular monitoring, you stand a far better chance of pre-empting serious problems.